Nektar Therapeutics (NKTR) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first quarter earnings 2006 conference call. [OPERATOR INSTRUCTIONS] Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Joyce Strand. Ms. Strand, you may begin.

Thank you. Welcome to Nektar Therapeutics conference call today and our webcast to review our performance for the first quarter of 2006. I'm Joyce Strand, Director of Corporate Communications here at Nektar. Today you'll be hearing from Rob Chess our Chairman of the Board as well as our acting President and CEO; Lou Drapeau, our Senior Vice President of Finance and Chief Financial Officer; and Chris Searcy, our Vice President of Corporate Development.

Before we get started, please note that the following presentation contains forward-looking statements that reflect our current views as to the Company's business strategy, projected financial results, future products, product and technology developments, funding, collaboration arrangements, clinical trials, manufacturing scale up, as well as other future events and operations relating to the Company. These forward-looking statements involve uncertainties and other risks that are detailed in Nektar's reports and other filings with the FCC including our annual report on Form 10-K for 2005. Actual, events could differ materially from these forward-looking statements. And we assume no obligation to update any forward-looking statements as a result of new information or future events or developments.

Also, I would like to remind you that the web broadcast of this conference call will be available for replay through May 24, 2006, on the investor relations page at Nektar's website at www.nektar.com. In the event that any non-GAAP financial measure is discussed on this conference call that is not described in our earnings release, related information will be made available on the investor relations page at our website as soon as practical after the conclusion of this conference call. I'll now turn the call over to Rob Chess.

Thanks, Joyce. Today we would like to spend most of our time with you providing a status of Nektar today, our view of our opportunities and challenges, and the plan that our senior management team and I have forged over the past few months to maximize shareholder value over the next several years. Lou will also be providing some brief comments on our financial results.

In examining the situation at Nektar, our take is that the core strategy laid out over the last year is sound. Although, as I will discuss in a moment, there is considerable work needed to better focus the Company and manage the underlying cost structure. The core elements of the strategy are, first, to build value through long-term leadership in inhaled insulin. Second, to apply our technology base to develop high value products ourselves for less risk and less cost than typical chemical entities. And third, to enter into high value partnerships for product opportunities that we do not intend to develop ourselves. The key question for us is how best to execute this strategy.

In reviewing the Company, we looked at our near and long-term revenue growth opportunities, our expense and our cash position. My view is that we are in excellent shape for outstanding revenue growth, have the cash to move the Company to profitability, assuming a good Exubera ramp, but we need to work our underlying expense structure and better focus the Company to maximize shareholder return. Over the next 3 to 4 years, our growth will be largely driven by Exubera sales, but we will also see a maturing, non-Exubera pipeline, as UCB's Cimzia, Roche's CERA, and Novaris' Tobramycin inhalation powder come to market. Both CERA and Cimzia were recently filed for approval in the U.S. and the EU.

While most investors are currently focused on the Exubera opportunity, we expect to generate $25 to $50 million at peak sales from each of these products. They are important components of our profitability and near term growth picture. Longer term, our main growth will be driven by the expansion of revenue from Exubera, follow-on Exubera products and our proprietary products once they come to market. We have strong programs in each area and I'll touch more on them later.

From a cash possession -- perspective, we are in a solid position. We ended the quarter with approximately $528 million of cash, cash equivalents, short-term investments, and investments in marketable securities. Even if we pay off our 103 million of 2000 convertible debt in cash, we are in good shape to reach profitability with cash on hand assuming a good Exubera ramp. One of our highest near term priorities is to focus on controlling our underlying expense structure. This is a typical issue for a company moving from the development phase into commercialization and profitability. There are three paths we will be pursuing to lower our expense trajectory and to reshape the Company. Including divesting noncore assets, partnering the first two proprietary programs while retaining significant upside, and making efficiency improvements. I would like to explore each of these briefly.

First, we will be divesting spinning off or otherwise spinning off of assets that do not fit our strategy or are not likely to provide us with a good return. The first step we are taking is to sell or dispose of our super critical fluid processing technology. This technology is very promising, but still at an early stage and not one that fits into our focus, or that we can afford to develop sufficiently to realize significant value. We are in the process of identifying additional opportunities where we can monetize assets and lower our spending through disposing of parts of our business that are no longer optimal fits. You should expect to hear more about these dispositions during the course of 2006 and 2007.

Second, we plan to partner our two lead proprietary programs, Amphotericin B inhalation powder for preventing fungal infections and inhaled Amikacin for treating hospital acquired pneumonia. Our goal will be to retain some form of marketing rights and significant upside in the U.S. market while deferring some of our development costs. Previously that we said we plan to modulate spending on these programs based on Exubera sales. Although we remain confident in the potential of Exubera, we believe our partnering strategy makes good sense regardless of the Exubera ramp. By decoupling Exubera sales from proprietary spending, our shareholders can better benefit from an upside Exubera sales scenario. We have just initiated partner discussions, so it will probably be not until the next year that partner deals are consummated. Until then, we continue to make progress with each of these products.

Third, we will be working to improve the efficiency of how we do business. As we focus on gaining Exubera approval, we were correctly concerned more with getting things done rather than with efficiency. With profitability on the horizon, we need to be more efficient in how we work. We are rolling out a Six Sigma program that has been usually successful in companies such as General Electric, and Allied Signal to drive efficiency and productivity improvements.

We are in each of these three programs now, that is divesting noncore assets, partnering the two -- first two proprietary programs while retaining significant upside, and making efficiency improvements. However, I expect the results will start to accrue mainly in 2007 and 2008. We have said previously we are planning to achieve profitability 12 months after a broad launch of Exubera in the U.S. and the major European markets, assuming a reasonable sales ramp and exclusive of nonstock related expenses.

Since Pfizer controls the timing of launch in the various markets, we believe a simpler way to manage the business and to communicate our goal to investors and employees is to target full year profitability in 2008, exclusive of noncash, stock-related expense and assuming a good Exubera uptake. Our partner Pfizer, has characterized the analyst consensus in 2010 as lower than their internal forecast of approximately $2 billion. Assuming Exubera is tracking to be a multi-billion product by 2010, we should be in good shape to achieve our 2008 profitability goal. I would now like to turn to a discussion of our major products beginning with Exubera.

There is no question that Exubera will play an important roll in Nektar's growth. Having been involved with Nektar for 15 years, it is difficult to convey how excited I am that the product will soon be available in local pharmacies and benefiting patients. We are pleased to see that the first launch of Exubera by Pfizer is occuring this month in Germany. We expect Exubera to be very well accepted. The history of the drug delivery industry shows that when there is a nonobjectable alternative, that product both expands the market and becomes the market leader. I expect Exubera will be no different. In one study that was recently published by SG Cowen, of the 600 diabetes patients surveyed, 89% of those surveyed diabetic patients currently on insulin which switched from injected to inhaled insulin, 93% of those surveyed diabetic patients rate Exubera's safety as equivalent to injected insulin or better, and 92% of the 43 patients with experience in the Exubera trials would pay an equivalent or a premium for inhaled insulin relative to injected insulin.

Our goal at Nektar is to build on our first to market position and to remain the leader in the field of inhaled insulin for a long, long time. There are four reasons why I feel confident about our long-term prospects. First, we estimate that we have a 3 to 4 year lead if our competitors execute flawlessly. That length of time is indeed rare in the pharmaceutical industry today where 6 to 12 months is more than norm for first to market products. A 3 to 4 year lead will allow Exubera to be established with patients and physicians and to develop broad safety data and field use.

Second, meeting the time lines for completing the scale up to meet a 2009 or 2010 launch for competitive products will be a daunting challenge. You need to develop and build the capability to make inhalers in the millions, dose units in the billions, powders by the ton. Changes needed for scale up in one aspect of the system affects the others. As I can tell you from experience, scale up really goes as expected.

Third, we want to ensure a leadership -- to ensure leadership positioning, we are investing in life cycle management for Exuberan and have been doing so for quite a while. We are not at liberty to discuss the efforts, as much as you would like us to. But our intent is to maintain leadership with Pfizer well into the future. In fact, because of the importance of this effort, our co-Founder and Chief Scientific Officer, Dr. John Patton is now devoting his full-time efforts to our Exubera life cycle management program.

Finally, Nektar has a amassed a very broad patent portfolio, including 36 issued patents in the inhaled insulin space. These patents cover powder processing, powder filling, room temperature stability, formulations, inhalers, and even the delivery of powdered insulin to the deep lungs in the commercially interesting range. As the innovator, we have invested heavily in our intellectual property assets and plan to aggressively enforce our IP rights. The bottom line for Exubera is that we have a truly revolutionary product, it's going to change the way diabetes is managed. We have a many year lead in the market, a strong IP position, a life cycle management program for long-term leadership, and with Pfizer the best possible marketing partner. After the initial ramp, we feel confident that Exubera will be generating a growing stream of several hundred million dollars per year in cash flow to Nektar for many, many years to come.

While our growth through 2010 is dependent on Exubera and partner products. The post 2010 growth will be driven mainly by Exubera plus our proprietary products. I would like to talk for a few minutes about our proprietary product strategy. We will be focusing our efforts on two therapeutic areas. Diabetes and pulmonary infectious diseases. Although an additional therapeutic area may emerge over time. Diabetes is an obvious choice for us due to Exubera and the need for improved delivery more broadly in the field. The area of pulmonary infectious diseases is a logical choice for us also, given our leadership in inhalation technology. We plan to change the treatment paradigm for severe lung conditions from systemic therapies to pulmonary medicine.

Direct pulmonary therapy is the preferred treatment mode for asthma and cystic fibrosis. We have the technology to make direct pulmonary therapy the preferred treatment for severe, bacterial, fungal lung infections as well. We have identified two programs we have taken into clinical testing. The first is Amphotericin B inhalation powder for preventing fungal infections in immune compromised patients. . The second is inhaled amikacin for adjunctive treatment a gram negative pneumonia in mechanically ventilated patients. Both of these programs share the following attractive attributes.

First, both drug molecules are currently administered systemically, but has severe renal toxicity that limits dosing. Local delivery to the lung could enable a prevention indication in the case of Amphotericin B and more effective treatment in the case of Amikacin. Second, both indications are for severe hospital-based applications where death is an all too frequent outcome. These are products that should command premium pricing and could be marketed by Nektar in the U.S.

Third, both products are uniquely enabled by Nektar technology. We have conducted two Phase I trials and have long-term toxicity studies underway for the inhaled Amphotericin B product, and inhaled Amikacin is in Phase II trials. The key challenges for us in the near term will be to make good strategic decisions for our clinical trials so we can assure that we do great clinical trials. We are currently working together with key opinion leaders in each field to help with the design of the clinical programs for late stage trials and registration. One important move we are doing on that front is with our clinical plan for the inhaled antibiotics product, which is in Phase II trials right now. As you may recall, this Phase II trial to determine pharmacokinetics and dosing for [Inaudible] was the trial we were continuing following the Arigen acquisition. However, the trial was not designed to show efficacy.

After our internal evaluation, we determined that with the 50 patients we've already enrolled, we have enough data from this trial to design follow-on trials to establish the efficacy of Amikacin to treat hospital-acquired pneumonia. We are currently evaluating the clinical and regulatory pathway to get those products to market in the shortest time while managing the risk. These products have the potential to generate several hundred million dollars per year of sales to Nektar. In summary, we are well-positioned to grow revenue in the near term with Exubera and the maturation of our partner product line. And long term with follow-on inhaled insulin products and proprietary products in the pulmonary antiinfective field. The key challenge will be to translate revenue growth into profitability and then to significant profit growth. The steps I have outlined to better focus the business, attract partners to provide funding for the lead proprietary programs, and operate the business more efficiently will ensure shareholders benefit from the products successes of Nektar. I'll now turn the call over to Lou, who will briefly discuss the quarter results and then I will end with an update on our CEO search prior to turning the call over to your for your questions..

Thanks, Rob. And good afternoon, everybody. Rather than provide a summary of our financial results, which you can see from our press materials. I would like to just point out a few things. First, our first quarter revenue of $29 million does include Exubera sales to Pfizer, as well as royalties and sales of other products. However, there is only one month's worth of Exubera sales to Pfizer. There's a delay in recognizing revenue based on a 60-day acceptance condition with Pfizer so only one month of revenue was recorded in the first quarter, although we've been actively shipping all three months of the quarter. Each of the remaining quarters in 2006 will have months of Exubera product sales to Pfizer. Regardless, we still expect manufacturing and royalty revenue related to Exubera for 2006 to be in the range of 60 to 80 million with the majority of the revenue being generated by manufacturing sales to Pfizer.

Second, for the first time, the net loss in the first quarter of 2006 includes $5 million of nonseverance stock-based compensation expense as a result of the implementation of FAS 123R during the quarter. In addition, the loss also includes 3.9 million of severance cost, including $2.2 million of stock-based severance compensation, related to the requirement of our former President and Chief Executive Officer, as well as other personnel.

Finally, we are updating our guidance provided at our year-end conference call, including an increase in the amount of our FAS 123R nonseverance stock-based compensation charges from 15 million to 20 million. And other special charges related to severance and restructuring.

In summary, our guidance is as follows. We are not changing our revenue guidance, and still anticipate revenue for 2006 in the range of 160 to 190 million, including 60 to 80 million manufacturing and royalty revenue related to Exubera. With the majority of the revenue being generated by manufacturing sales to Pfizer. We are updating our net loss guidance as follows. We are currently anticipating a GAAP net loss of 135 to 150 million. And a non GAAP net loss of 100 to 115 million. The GAAP net loss is projected to be $20 million higher than our previous guidance, but there's no change in the non GAAP loss guidance. The change in the GAAP projected loss is due to an increase of 5 million in FAS 123R nonseverance stock-based compensation charges and the expenses of approximately 15 million of special charges related to restructuring and severance.

We also want to let you know that given our intent to continue to assess the company as Rob has just described, our 2006 GAAP net loss estimate may change as we evaluate potential restructuring activities. The benefits from the restructuring alternatives that we are currently evaluating and additional ones that we may consider this year would likely begin to have a positive impact on net loss in 2007 and beyond. We are also reiterating our cash, cash equivalents, short-term investments, and investments in marketable securities at year end at approximately 415 million to 440 million. That is all I wanted to say today about our financial performance. If you have questions about our results, I would be happy to answer them following our prepared remarks. Now, I'll turn the call back to Rob who will update you our CEO search. And then we'll turn the call over to you for questions.

Thanks, Lou. I would like to conclude by giving an update on our CEO search. As I said on our call last quarter, we're looking for a CEO who has experience running a business the size of where Nektar is planning to be 5 to 10 years from now. We also want someone who is outstanding at the intersection of product selection, building product development organizations, and commercialization. A key criterion for us will also be someone who is a cultural fit, but can bring the decisiveness and execution skills needed to move the Company to a development stage to profitability and sustainability. With Exubera's approval, our strong cash position, our emerging pipeline of proprietary products, and a strong management and scientific team, Nektar is a very attractive opportunity. I have been conducting interviews and am pleased with the quality of the candidates, and expect that we should complete the search in the second half of this year.

During this interim period, until we have selected a new CEO, I'm focusing my time on assuring that we are producing device and inhaled powder, insulin powder to meet Pfizer's Exubera needs, ensuring strong progress on inhaled insulin follow-on products, making good clinical strategy decisions on our proprietary products, managing our cost structure to increase profitability once we turn the corner, and of course, the CEO search. Obviously this is a very exciting time for the Company.

Pfizer will be initiating the first launch of Exubera in Germany shortly, and they have stated that they plan to launch in the U.S. sometime this summer. This is an event that patients, physicians, and employees of Nektar and Pfizer have anticipated for many years. Again, I personally can't wait to start seeing people I have never met using Exubera to treat their diabetes. In addition, our proprietary pipeline is moving through mid stage clinical trials and we are refocusing the Company to make sure that we drive to profitability on the back of Exubera and our other partner products. I would like to turn the call over now to answer your questions. Operator, will you poll for questions?

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from Ian Sanderson, from Cowen and Company, please go ahead.

Good afternoon, and thanks for taking the question.

Sure.

The first one is, probably for Lou, on the 60 day acceptance condition on the product sales to Pfizer. Does that mean through the balance of this year what you will be booking will be on a 60-day lag on the royalty side?

No, Ian, it's on product sales not the royalty. Product acceptance is 60 days for the product sales, we anticipate recording the royalty on a one quarter lag.

And as a result, Ian, you should not -- I think as we said before, you should not anticipate much in royalty this year because it's a one-quarter lag. The first launch is in Germany, this month, summer this time -- for the U.S. So we're not going to be seeing any royalties until a quarter after those.

Okay. And then related to that, are your economics any different in Germany or in Europe in general than they are in the U.S.?

No.

Okay. And then the guidance for the internal R&D spending was not included in your guidance statement this time, is the 80 to 90 million of internal R&D spending target under review?

No, Ian, it is still the same.

Okay. Thank you.

The next question comes from Rich Silver, from Lehman Brothers, please go ahead.

Good afternoon. Just wanted to maybe get a better sense of quantification of the cost savings that you're talking about impacting financials beginning in '07. And if it's . something you're not willing to comment on yet, when will we have a sense of the number?

Let me give you a general answer, and Lou may have some more to add. Obviously we haven't given '07 guidance at this point, it's not something that we'd be commenting on publicly. I think the key issues for us will be -- a fewfold. One of them, are there any parts of the business that just are no longer fits? Obviously, Bradford being one of them. That obviously will have a benefit for us since that that was a lost mode for us, and as we do others, I don't think, we're ready to probably quantify the specifics, but I think as we give 2007 guidance, obviously at that time, we'll be able to give you a much better feel. I think as we make individual moves you can probably see how the pattern fits together.

Okay. And then just back on the Exubera revenues unchanged at 60 to 80 million for the year, so we should assume that a difference of 10 months verses maybe 12 months isn't enough to alter the revenue expectation because you're essentially going to be manufacturing the same quantity that you would no matter what.

We're manufacturing against Pfizer's orders, and we're very pleased with the way that manufacturing is going. But we are confident that we're going to make the 60 to 80 million.

Okay. Thanks very much.

Next question comes from Hari Srinivasan from Merrill Lynch. Please go ahead.

Yes, thank you. Just two questions. The first is Rob, in terms of developing these proprietary products both Amphotericin and the Amikacin products, do you anticipate going through a traditional Phase II in terms of dose finding, et cetera, et cetera, or given the fact that they're anti-infective do these generally hold a shorter development time line? I'm just wondering whether you can maybe clarify that. I'm also wondering whether you can clarify, is the Amikacin program the lead program for the anti-infective program? Or is it just one of, maybe, I know you have the Gentamicin, Vancomycin combo, as well. So I'm just wondering, which one is the lead product there? And the second question, I have other than those is what type of data that you might be expecting for Exubera at the upcoming ADA.

Two things on it. I'll have Chris give you more of the specifics on the anti-infective. But one of the things you point out there, which I think is a very good point, and one of the reasons we like this area to be in is oftentimes the clinical path in this area is much simpler than for many other drugs because if understand how much you have reaching there in the pharmacokinetics, you can often go make leaps with much less risk than you can in other therapeutic areas. Chris, you may want to comment a little more.

Sure, Harry, yes, as it relates to -- I'll answer your last question. I think we view both the Amikacin and the inhaled Amphotericin B program as our lead programs. Not one versus the other. And then in terms of the clinical trial, we've talked about the inhaled Amphotericin B, because it's a prevention trial and we're trying to prevent a very serious infection that happens in maybe 5 to 15% of patients. You couldn't really do a Phase II prevention trial to show efficacy because you'd have to power it to the size of a Phase III trial. So there may be some steps we can take to reduce between where we're at currently and Phase III trial. We're looking at that. But that's one where you'd likely go to a pivotal trial after you figured out the right dosing regimen and had the right -- believed you had the right profile in terms of toleration.

On the inhaled antibiotics to treat, adjunctive treatment of gram negative infections in patients on mechanical ventilation, that program we're also looking at what the most expeditious clinical path on that. And that could, we could either do a Phase II or we could go into a pivotal, and we're still trying to figure out the best clinical regulatory strategy there, so no real update on that right now.

And just to answer your other questions, Hari, is on sort of you had asked about Gentamicin and Vancomycin and I think we had said at a previous conference call, that after the [Inaudible] one of the things we liked about them was their Amikacin program. We actually think that's a gram negative, very, very effective. Particularly in the multi-drug resistant field. That's really what we're focusing on now. That's our lead program in the antibiotics field, it's not Gentamicin and Vancomycin. And I think that's -- we had said that on a previous call. And there's no change to that. Data at the ADA you asked about is -- obviously that's Pfizer's data that will be presented for them to comment on. Though, traditionally, the abstracts come out well before the ADAs, I would sort of stay tuned and see when the abstracts come out.

Thank you.

The next question comes from Jami Rubin from Morgan Stanley. Please go ahead.

Thank you, just a couple questions. Chris, and Rob. Last week at our conference, I thought I heard you say that you were seeking partners for both your lead products primarily ex U.S. and keeping the upside in the U.S. market. Now, am I hearing a change in that strategy? And just curious to know why you'd want to give up your upside if you're confident in the Exubera launch, which clearly, you are. So if you could talk about that. And secondly, just sort of a nit-picky question to Lou. I'm just confused about your treatment of FAS 123 in the last -- when you last gave guidance, stock options were included in non GAAP earnings, and now it looks like it has been excluded. And I'm curious to know why it's grown from 15 to 20 million?

You want to answer that first, and then I'll answer the second question.

Right when we gave guidance last time, we said 115 million to 130 million, which included 15 million of FAS 123 stock compensation expense. This time, we've increased it, but like many companies we're feeling our way and learning a lot more about FAS 123R than we knew just three months ago. And we refined our calculations and done a better job, I think at the calculation as probably a lot of companies are doing. So the best estimate we have now is the 20 million and it is fully included in the GAAP guidance for 135 to 150.

And Jami, answer your question on our partnering strategy. Identical to what we talked about at your conference last week is, our ideal scenario, we're going to be out talking to people. We'll obviously get some feedback back from potential partners, our ideal scenario is to retain significant U.S. rights and U.S. upside while partnering ex U.S. and the reason for that is pretty simple. It has nothing to do with our view of Exubera, which you know is quite bullish. We just think independent of that, this makes logical sense. These are the first products that we're bringing forward, the first ones that we potentially may even market ourselves in one or two of those cases. We're not in the position to basically exploit Japanese rights, South African rights, Brazilian rights, or even European rights. We actually think this is the best way to optimize value for our shareholders, by one, making sure we're getting strong marketing partners in the area we're not well equipped to market ourselves and secondly to basically defray costs which will hopefully help our earnings, 2008/2009 when we're planning on turning profitable.

Thank you.

The next question comes from Jim Reddoch from Friedman, Billings, Ramsey. Please go ahead.

Hi, David Ansell in for Jim. Just a couple quick questions. One is, what level of inhalation device inventory do you plan on having on hand at the time of the U.S. launch? Secondly, is -- when do you expect the next generation inhalation device to be ready? And thirdly, for R&D expenses, how should we think of R&D expense growth with the -- in light of what you announced today about your plans for partnership, how should we think about R&D expense growth beyond 2006? Thanks.

I like three part questions, because it will give you a chance to hear from myself, Chris, and Lou. I'll take the first. The inventory question. That's simple because the answer is we build to Pfizer's forecasts. And they obviously don't want us talking about anything to do with their specific buildup. That would be an inventory question to ask them rather than us, but our job is to basically build to their forecast on their decision on how much inventory they want to carry. Chris, do you want to take the question on the next generation?

Yes, on next generation, just to reiterate what Rob has said and what we have said previously, is that we are actively working on a next generation program with the objective of being into the market at or before competitors. And we think life cycle management for a product like Exubera is important. And we've actually named John Patton to work full-time on the life cycle management strategy, and he's building a small group to do that. We've been working on it for some time, we just haven't given any specifics and probably won't just for competitive reasons in terms of where we're at in the program.

And the last is R&D expenses in future years given the fact that we're looking for potential partners for our lead proprietary products. Hopefully, and it's hard to speculate on what the terms of an agreement is since we don't have one. But one of the things that we would be looking for would be a partner that would take on some of those development expenses and reduce the amount of R&D expenses that we'd have for those two programs in the coming years.

Just a quick follow-up. Are you still expecting to see year over year growth in beyond '06 in R&D? Or is that sort of up in the air depending on the partner?

It's too early to tell at this point in time. We haven't gone through, obviously the planning for next year, but I would certainly think on the spending for these two lead programs that if we were able to successfully partner the programs and the terms of the agreement included, substantial R&D cost-sharing that we should reduce the spending on these programs.

Yes, I think the one thing to keep in mind there is, we've just started partnering discussions. My experience having done this a long time is sometimes these go quickly, sometimes these take quite a long time. I think your expectation is probably should be that there probably are partner agreements this year, and it happens sometimes, perhaps next year, and if it happens in the later part of next year, obviously that would have much less of an effect on reducing our R&D spend than if it happened at an earlier time.

Right. Thank you.

The next question is a follow-up from Ian Sanderson, from Cowen and Company, please go ahead.

Yes, thanks for taking the follow-up. In terms of restructuring plans, besides Bradford, Particle Design, and ShearWater, are there other separable units that we should be taking a look at here?

Ian, we aren't talking publicly right now, we're still going through as a management team looking at it. And part of it, there's obviously Bradford is an obvious separate unit. There's also just technologies inside the Company, or assets inside the Company that are wonderful, or assets that we just may not have the funds to exploit or the focus to exploit right now that we may find ways of monetizing. I wouldn't just consider separate units or what to look at. It's more, we're looking at sort of asset area by asset area, saying which are the ones that we really need going forward to implement our strategy? Which of the ones may be very good but just are not ones that we properly exploit and what's the best way to monetize that?

And should we assume that the PEGylation business is a core franchise for you?

The PEGylation business is certainly very important to us. If you look at actually two of our proprietary programs, are actually right now out of, PEGylated programs. One, that we've talked about in the oncology field, one in the pain field. Actually, if you look also in terms of profit contribution 2008 and beyond, you look at some of the products that are going to be major contributors there that we hope, assuming they get approved. CERA, they're right out of that area, so it's actually, something that plays a very important role to the company.

Okay. Thank you.

The next question comes from David Steinberg from Deutsche Bank, please go ahead.

Thanks. A couple questions. Rob. I know you're refraining from guidance post this year, but at your analyst meeting last September, you guys did give out some broad parameters, I think something like 650 to 800 million in revenues four years post the launch, and operating margins, I think in the 25% range. I was wondering given your focus on keeping your expense in line, would those operating margins look a little bit differently four years from now?

A little hard for me to tell right now what four years from now is going to look like, David, I think what we're trying to do is to make the steps that make the most sense for the business and probably build the model around that. Probably a little early to tell what the affect of that will be 2010 and out. They'll hopefully, if we're successful at this, obviously you'd be at a good profit ramp at this time. Hopefully the growth rate will be good, particularly because it allow us to invest in what we think will be the really high return programs, but I think it's a little premature for us to go out there and say what the changes are going to be four years out right now.

So we should disregard that guidance from September, basically?

Yes, as I've said. I haven't looked at that specifically right now, so I probably wouldn't one way or another at the moment.

Okay. And then on your patents, I think you mentioned you had about 35 or so issued patents, are there any more that are working their way through the system that we should be watching out for? And then secondly, is your IP position more applicable to competitors in the dry powder area, or will it also potentially have repercussions with companies with the liquid aerosols?

Two parts to that. One of them, we have 36 issued patents right now, we have additional ones that are working their way through the system. So you should expect to see several of those, assuming we're successful in prosecution coming out. As you might imagine, that's a major focus for the Company, as the innovator in the field, we want to make sure we're getting full protection for all of the innovations and inventions that we've made here. The bulk of our IP is in the dry powder inhalation field. Absolutely. The formulation side in some cases the delivery side, we have a patent that covers pulmonary delivery of insulin to the deep lung, and various Phase of powder processing, and on device side. And so obviously, I think our strength is far more in the dry powder area than more broadly within insulin. But we do have some things that are more broad than that. But it's principally around the dry powders, and dry powder from a lot of different directions.

Okay, and lastly, I think you said you're launching in Germany this month, so I'm sure you'll tell us that we should call Pfizer, but since it's launching imminently, any knowledge on the price and reimbursement in Germany?

David, you've been at this a long time. You knew what we were going to say--.

I thought I would try.

Okay. Any other questions, David?

That's it, thanks.

At this time, we have no additional questions.

Oh, great. Well, thank you, everyone. Appreciate you joining the call. I think it's a very exciting time for the company as we're launching Exubera and restructuring for growth. And we look forward to keeping you informed over the next several conference calls.

Thank you for participating in the first quarter earnings for 2006 conference call. This concludes the conference for today, you may all disconnect at this time.